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June 19, 2014

Billion-Dollar Pensions, Nonprofits Favor Equities — for Now

Nonprofits and pensions managing $1 billion or more in assets hold a substantial portion of their assets in equities, according to Market Strategies International. MSI released findings in June that highlighted some of the key concerns of institutional investors.

Pensions and nonprofits share an interest in equities, particularly actively and passively managed U.S. public and actively managed international equities.

While pensions hold 38% of their assets in those asset classes, another 35% is held in U.S. fixed income. By comparison, nonprofits allocate just 18% of their assets to fixed income, preferring real assets, commodities and alts like hedge funds and real estate (26%).

MSI found that over the next three years, though, $1 billion-plus pensions will likely shift out of actively managed U.S. equity in favor of alternatives and actively managed fixed income. The report noted that is part of an established trend.

Nonprofits, on the other hand, will likely increase their allocation to active U.S. equity, although MSI found the biggest change in actively managed international equity, a class to which 49% of nonprofits say they expect to increase their allocation.

MSI noted that derisking remains pensions’ main priority; in fact, respondents reported it has become more important over the past couple of years, “perhaps a reflection of their desire to maintain the improvement in funding status they have recently achieved,” according to the report.

Nonprofits are motivated by higher yield and diversification, MSI found. “In addition, capturing tactical opportunities also emerges as a consideration factor, likely a reflection of the ability of these investors to take a slightly more opportunistic and shorter-term view.”

While investment performance rated highly among criteria for selecting asset managers (81% among pensions and 72% among nonprofits), it was not the most important. MSI found pensions are looking for managers with “integrity and transparency,” while nonprofits are looking closely at the managers' investment philosophy and team.

Among nonprofits, at least, they’re likely doing the looking on their own. Nearly half of the managers currently used by $1 billion-plus nonprofits were identified by internal investment professionals, MSI found, compared with 43% who were identified by a consultant.

Pensions were far more likely to use a consultant. Fifty-nine percent of managers on their platform were identified by a consultant.

MSI noted that reaching this market can be difficult for several reasons. “Investors in this segment are more knowledgeable and experienced than their counterparts managing smaller asset pools, and the competitive set is larger, with many more asset managers battling for their piece of this coveted market,” according to the report.

Consequently, asset managers need to “target their outreach to the unique needs of each segment, recognizing the differences in asset allocation strategy and manager selection between these types of institutions.”

The report acknowledged that while there are only a few of these $1 billion-plus institutions (136 of the 600 institutions surveyed), they “are poised to control a substantial portion of institutional assets for some time to come.”